01 Aug Return of Deposits in Insolvency: A Guide for the UK
Recently we have seen a couple of high-profile instances of companies ceasing trading or entering into insolvency whilst holding substantial amounts of deposits paid by its customers. Both Carpetright and the SK:N Clinic group have ceased trading this month, with little to no warning to their customers. When a business becomes insolvent, it can have significant repercussions for creditors, employees, and consumers alike. Among the issues that arise, the return of deposits can be particularly contentious and complex.
The Legal Framework
The return of deposits in insolvency is governed by several key pieces of legislation, including the Insolvency Act 1986 and the Consumer Rights Act 2015. The specific treatment of deposits can vary depending on whether the depositor is a consumer or a business.
Consumer Deposits
Consumers who pay deposits for goods or services that are not delivered due to the company’s insolvency may face challenges in recovering their money. Under the Consumer Rights Act 2015, consumers are entitled to a refund if the goods or services are not provided. However, in an insolvency situation, this right becomes much more difficult to enforce. There are however things consumers can do to protect themselves.
Section 75 Protection
If a consumer paid for goods or services using a credit card and the amount was between £100 and £30,000, Section 75 of the Consumer Credit Act 1974 provides protection. The credit card company is jointly liable with the supplier, meaning the consumer can claim a refund from the credit card issuer.
Chargeback Schemes
Debit and credit card providers may offer chargeback schemes, allowing consumers to dispute a transaction and potentially receive a refund. Whilst not a legal right, this scheme can be useful in recovering deposits.
Claiming as an Unsecured Creditor
If neither Section 75 protection nor chargeback schemes apply, consumers may have to claim as unsecured creditors in the insolvency process. Unsecured creditors are typically paid last, often receiving only a fraction of their deposit or nothing at all.
Alternatively in some circumstances deposits may be held on trust, if that is the case it should be easier to get a refund.
Practical Steps for Recovery
To maximise the chances of recovering deposits in an insolvency situation, the following steps are recommended:
1. Act Quickly: Notify the insolvency practitioner as soon as possible to register your claim.
2. Documentation: Provide all relevant documentation, including contracts, invoices, and proof of payment, to support your claim.
3. Legal Advice: Consider seeking legal advice to navigate the complexities of insolvency law and improve your prospects of recovery.
4. Alternative Solutions: Explore other avenues, such as insurance policies that may cover losses due to insolvency or industry-specific compensation schemes.
The return of deposits in insolvency involves navigating a complex legal landscape. By acting promptly and strategically, depositors can mitigate their losses and enhance their prospects in an otherwise challenging situation.
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